Big-Iron Brouhaha: System z Sales Soar

Attendees at this month's SHARE user conference in Anaheim should have a lot to cheer about on the mainframe front. Last year at this time, after all, Big Iron was in something of a rut: IBM Corp.'s System z10 was coming up on its third birthday, which made it long in the tooth -- even by mainframe standards.

Furthermore, Big Blue was then in the midst of prepping a Big Iron refresh -- and Big Iron shops knew it. As a result, mainframe sales tanked, seriously impacting IBM's bottom line. The result: Hewlett-Packard Co. (HP) was able to wrest server market bragging rights away from Big Blue -- and naysayers started whispering (once again) about the mainframe's soon and inevitable demise.

If IBM's Q4 financial performance is any indication, however, demand for Big Iron is stronger than ever. Sales of System z surged by almost 70 percent in Q4. The company as a whole posted its best revenue growth in almost a decade -- attributable chiefly to sales of IBM hardware and software.

"Systems and Technology had fantastic performance, with 21 percent growth. We had growth in every platform, but the most impressive growth was in our System z mainframes, which were up almost 70 percent," said CFO Mark Loughridge, in Big Blue's Q4 earnings conference call.

Systems and Technology turned in its best performance in over a decade, according to Loughridge -- thanks largely to pent-up demand for System z.

"System z revenue … [growth was] driven by our first full quarter of shipments of the new z Enterprise," Loughridge pointed out, adding that MIPS growth (up 58 percent year-over-year) was "the highest growth in six years."

Also during Q4, IBM picked up two dozen new System z customers.

System z's gangbuster quarter must necessarily be seen from the perspective of its performance last year, when mainframe sales tanked in the fourth quarter. At this time last year, after all, Loughridge reported that Big Iron sales were down 27 percent, year-over-year, chiefly because customers were holding out for Big Blue's next-generation mainframe CMOS, z Enterprise. The upshot is that System z didn't have to clear too high of a hurdle to turn in a strong Q4 this year.

That being said, System z's growth spurt easily outpaced -- by almost 3,500 percent -- the anemic growth of IBM's Power Systems line. Like System z, Power Systems had a bad Q4 2009. Revenues were down by 14 percent year-over-year. This was partly because of the economic climate -- which hit RISC/Unix disproportionately hard -- and partly because Power, too, was due for a major CMOS refresh.

The Power behind Power Systems

Which brings us to Power. Although System z had a rip-roaring Q4, Big Blue's Power Systems line did not. In IBM's Q4 conference call, Loughridge chose to accentuate the positives, noting that Power has now posted almost 12 consecutive quarters (three full years) of year-over-year market share gains. "This was the first quarter with the complete POWER7 product line available. We had strong customer acceptance of the newly introduced entry systems, which grew 30 percent year-to-year," said Loughridge, who added that Big Blue had "sold out of our [Power] 520, 720, and 740 entry systems."

Big Blue also shipped three times as many Power 795 servers as it did in Q3.

That's the good news. The bad news is that Power Systems -- an umbrella brand that encompasses IBM's former System p (Unix) and System i (OS/400) lines --managed just 2 percent year-over-year revenue growth in Q4.

Power continues to grow its market share, to be sure -- but chiefly by slashing its costs. The Unix (or OS/400) isn't growing, either: most of Power's market share "growth" came by virtue of cannibalizing the Unix businesses of its competitors. "We drove over 280 competitive unit displacements, which resulted in approximately $325 million of business. This is the largest quarter ever for POWER competitive displacements," said Loughridge, who claimed that Power displaced more than 1,000 competitive platforms last year.

"Roughly 60 percent of these wins came from legacy Sun units install accounts and 30 percent from HP install accounts. We also drove x86 consolidations to POWER, with over 100 competitive wins."

What's more, Power Systems had a terrible 2010. Its revenues were off by double digits in each of the first three quarters of the year, relative to the first three quarters of 2009. On top of this, Power Systems had a perfectly awful 2009, too. Despite that, its showing in Q4 of 2010 marked Power's first positive growth all year. What's more, its 2 percent improvement -- although anemic -- is actually more encouraging than it might otherwise seem.

Rewind to this time last year and Power actually hadn't performed as poorly as System z: sales were down just 14 percent in the fourth quarter of 2009.

More to the point, Power's 2009 revenue was down relative to its performance in Q4 of 2008, when Big Blue's then-new Power Systems hardware line -- fresh off its August, 2008 rebranding -- managed to post an eight percent uptick in sales. (System z, on the other hand, was down 6 percent for the same period.)

In other words, System z's horrific performance in 2009 was made even worse by virtue of the fact that it was down -- year-over-year -- from its already depressed tally in 2008. Last year at this time, Power Systems was down relative to its anomalously high growth in 2009. (Power posted positive growth, even as IBM's other hardware lines were tanking.) This doesn't come close to erasing two years of poor performance for IBM's Power Systems line, but it does suggest that Power might once again have found its footing.